CRAMS cos buck pharma trend, give good returns

Khomba Singh and Noemie Bisserbe, TNNDec 3, 2007, 02.22am IST

NEW DELHI/MUMBAI: The pharma sector may have underperformed the Sensex , but companies providing contract research and manufacturing services (CRAMS) to global pharma companies have given good returns. While the shares of five most traded generic companies grew by a mere 4% during the last 3 months, CRAMS companies shares rose 19% in the same period.

"The market has a very positive view on CRAMS mainly because this segment offers better revenues visibility than generics," says Surajit Pal, senior research analyst with UTI Securities. "The global generic market is reeling under pricing pressure and there is no definite sign of improvement."

According to a recent report by Frost & Sullivan, the contract services market revenues for 2006 were estimated at $895 million or about one-sixth of the Indian domestic industry but it is growing at 43% annually. The market is still in its growth stage and is expected to sustain a grow rate of 33-34% between 2007 and 2013. Contract manufacturing accounts for 70% of this market, while clinical research and contract research account for respectively 16% and 13%.

"The world's top ten pharma companies are all saying today that they will increasingly outsourcing manufacturing and research to focus on their core competencies, sales and marketing. However, considering the size of these organisations, mobility of the thinking process and speed for taking decisions are an issue," says Mr Pal.

According to ChrysCapital MD Sanjiv Kaul the shift is because of the perceived huge opportunities in the outsourcing market. "Indian generic accounts for 11% of the global market and are facing pricing pressure. The perceived lack of opportunities in the generic segment has resulted in the erosion of market capitalisation of these companies."

In comparison, since India became TRIPS compliant in 2005, outsourcing is seen as a huge potential even though Indian companies are yet to show the performance. India now accounts for 3% of the global CRAMS market which will touch 10% in the next 10 years, he added.

The mood is also reflected in the investment by private equity (PE) players. The recent investments in the sector by private equity players such as ICICI Venture (Radiant Research), Citi Venture Group (Unimark Remedies), and Sequoia Capital (GVK Biosciences and Sai Adventium) have been bagged by outsourcing units.